How to maximise your tax benefits as a rental property landlord

The UK has traditionally been a hotbed of property investments and almost everyone wishing to have a “passive” stream of income has thought of “dabbling” in properties, specifically buy-to-lets. Buy-to-lets are considered safe, uncomplicated, low-risk and relatively “hands-off”, allowing you to carry on with the business of living.

However, while rental property investments can be financially rewarding, it is crucial to be on the ball when it comes to tax planning. So, what are the general rules of thumb when it comes to tax planning for your property portfolio? What are some common mistakes made and how can one avoid these? Should you form a property investment company as a tax vehicle or pay the taxes as an individual? Or as a partnership or a trust? Let’s start with a definition of a property investment company.

What is a Property Investment company?

According to HMRC, any company that predominantly holds properties as a long-term investment, with a view to generating income through rental profit, is deemed a property investment company. The properties in these cases, are considered the company’s fixed assets. Property investment companies typically take into account capital growth on these assets and short-term property sales are unusual, normally instigated by a strong commercial reason i.e. raising funds for expansion.

Do Property Investment companies offer any tax benefits?

In a nutshell, not always but can sometimes do so. A clear benefit is the indexation relief provided against capital gains. Also, costs such as interest and finance are deemed general overhead of the company and can be generously relieved for corporate tax purposes.

However, there are plenty of downsides:

  • Your company is NOT considered a trading company for tax purposes. This means that the shares in the company do not qualify for entrepreneur’s relief or holdover relief for CGT purposes.
  • The shares also do not qualify for business property relief for IHT (Inheritance Tax) purposes. This means that upon your demise, your next of kin will pay tax on the full value of the company when IHT is calculated.

The only exception to these tax rules for property investment companies are if they happen to derive their income (predominantly) from furnished holiday lettings. In that case, they will be eligible for entrepreneur’s relief and holdover relief and may even be granted business property relief.

So, if you are a landlord and you are not doing furnished holiday lets, it’s worth doing some careful tax planning to see whether you are eligible for more tax benefits as an individual/partnership/trust or a property investment company. It’s not always clear cut and your financial advisor should be able to guide you effectively.

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